Don’t blame globalisation, blame domestic policy

Globalisation has been blamed for many of the woes of the lower middle classes in western societies, as well as the subsequent rise of populism in the west, Donald Trump’s candidacy and the vote for Brexit.

But this deeply held belief has been challenged by a Resolution Foundation study which found that, contrary to popular belief, lower middle incomes in the developed world have, in fact, not stagnated.

The Resolution Foundation, a British think-tank, revisited a highly influential graphic – the “elephant chart” – produced by Branko Milanovic, a former senior official at the World Bank, and found that it could be reinterpreted.

Mr Milanovic’s “chart that explains the world” showed how globalisation, over the past 30 years, was responsible for the stagnating incomes of the middle classes in developed countries, while the global super-rich became even richer, and China saw its middle class booming.

First published in a 2012 World Bank working paper, the chart purports to represent the income gains made by the world’s population between the period of ‘high globalisation’ in 1988 (the fall of the Berlin wall) to the start of the global financial crisis in 2008 (the fall of Lehman Brothers).

It looks like an elephant raising its trunk with the tail on the left representing the poorest in the world (locked out of growth) and the trunk on the right the richest (the booming global elite).

Middle classes in China and other emerging economies (in the middle of the distribution) and the planet’s economic elite at the end of the chart (forming the raised trunk of the elephant) seem to have hugely benefited from the effects of globalisation.

Meanwhile, “the biggest losers (other than the very poorest 5 per cent), or at least the ‘non-winners’, of globalisation were those between the 75th and 90th percentiles of the global income distribution whose real income gains were essentially nil,” according to Mr Milanovic.

These “non-winners” include ordinary people in the west, mainly in the US (and supposedly Donald Trump’s core supporters) and Europe, pointing to a decline of the developed world’s middle class, which would partly explain the rise of populism in rich countries.

However, in its report the Resolution Foundation noted two main flaws in the way the original data used to produce the “elephant chart” were aggregated:

A higher number of countries was used in later samples

Differences in population growth were not taken into account (making it difficult to compare the incomes of the lower middle classes over time)

Based on this diagnostic, Adam Corlett, an analyst at the Resolution Foundation, produced new charts correcting these apparent distortions.

Mr Corlett told Chief-Exec.com on Tuesday that “one thing that emerges from the data is just how astounding income growth has been in China. Between 1988 and 2008 typical incomes tripled (200 per cent growth – rising to >500 per cent for the richest) – even faster than many have interpreted from the hump of the original elephant chart. Incomes in most other developing countries, conversely, have grown less phenomenally, with growth rates that are not too different from the mature economies.”

This new adjusted version shows that the low and middle incomes and so-called “non-winners” have not fared as badly as first thought. It actually shows that their incomes have even improved over the years.

The president of the Resolution Foundation, Torsten Bell notes in his blog that after correcting the population growth bias “we find that incomes of the working/middle class of the developed world rose by around 25 per cent rather than stagnating”.

“And once we exclude [Japan and the ex-Soviet satellites states] from the analysis the income growth towards the top of the distribution rises again to around 50 per cent over the period, or around 2 per cent a year, a long way from stagnation.”

Globalisation did not harm the low and middle classes of the rich world.

Nevertheless, globalisation still throws up a range of challenges that need to be addressed but these are rooted in domestic issues, which need to be dealt with by governments and policy makers.

Mr Bell says governments should not “be let off the hook”.

“Domestic policy matters. To fetishise globalisation as the cause of all our ills is to let too many domestic policy makers off the hook for decisions they make, for problems they leave unaddressed and for the lower incomes working people experience as a result.”

According to the Resolution Foundation blaming the world’s woes on globalisation is not good enough. Governments and their policies should also be held accountable.

News Bites

May to hold talks with Merkel in Berlin
Theresa May is due to hold talks with German Chancellor Angela Merkel as she seeks to make progress on negotiating Brexit. The PM will travel to Berlin for the meeting at the Chancellery. It comes a day ahead of a speech on Saturday in which she is expected to set out the “security partnership” she wants to maintain with the EU. The UK is under pressure to reveal more detail about the final relationship it wants with the EU. Mrs May and her ministers are setting out what has been dubbed “the road to Brexit” in a series of speeches. BBC news, February 16

UK aims to keep financial rules close to EU
The UK is ready to set out its vision for how it wants financial services to operate after Brexit and favours an ambitious “mutual recognition” of regulations to preserve the City of London’s access to the EU. Under Britain’s proposal, the UK and the EU would recognise each other’s regulatory and supervisory regimes and would have aligned rules at the point of Brexit, with a mechanism that would monitor any divergence. Three senior figures briefed on Brexit discussions in the cabinet said that the government will back the proposal, which is also favoured by Mark Carney, the Bank of England governor. Financial Times, February 16

Business leader warns May against harsh immigration policy
British companies are facing a recruitment crisis, with labour shortages hitting critical levels in some sectors, according to a business leader who has urged the government to produce details on a post-Brexit immigration system. Adam Marshall, the director general of the British Chambers of Commerce, said the lack of candidates for some jobs was biting hard, and he warned ministers against bringing forward a “draconian and damaging” visa or work permit system. Surveys by the BCC showed that nearly three-quarters of firms trying to recruit had been experiencing difficulties “at or near the highest levels since [BCC] records began over 25 years ago”, he said. The Guardian, February 16

Lecturers want ‘radical’ tuition fee review
University staff are calling for a “radical” overhaul of tuition fees and higher education funding in England in a review of student finance. Sally Hunt, leader of the University and College Union, says the review must be more than “tinkering at the edges”. The review, expected to be formally announced in the near future, follows a promise by the prime minister to examine the cost of university. Theresa May said the review would show “we have listened and we have learned”. Ms Hunt, whose members are threatening strike action next week in a pensions dispute, says there needs to be a “fundamental look at university funding”. BBC news, February 16

Shampoo ‘as bad a health risk as car fumes’
Shampoo, oven cleaner, deodorant and other household products are as significant a source of the most dangerous form of air pollution as cars, research has found. Scientists studying air pollution in Los Angeles found that up to half of particles known as volatile organic compounds (VOCs) came from domestic products, which also include paint, pesticides, bleach and perfumes. These compounds degrade into particles known as PM2.5, which cause respiratory problems and are implicated in 29,000 premature deaths each year in the UK. Traffic had been assumed to be the biggest source of air pollution. The new findings, published in the journal Science, led to warnings that countries may struggle to hit pollution targets, with most tackling vehicle emissions. The Times, February 16

US rejects China bid for Chicago Stock Exchange
The US has rejected a proposed merger between the Chicago Stock Exchange and a Chinese-linked investor group. The decision comes after more than two years of reviews by officials. The tie-up was initially approved by the Committee on Foreign Investment in the United States, pending further approval by the Securities and Exchange Commission (SEC). But US politicians, including President Trump, have said letting a Chinese firm invest in a US exchange was a bad idea. Under the proposal, the Chinese-led North America Casin Holdings group would have bought a minority share of the privately owned Chicago Stock Exchange. BBC news, February 16

Labour gets 16,000 emails in five days urging it to consult on Brexit
More than 16,000 people have emailed Labour over the past five days, urging the party to consult members on Brexit after MPs said the topic was being ignored by its most senior policy body. The emails from party members will be examined by the party’s national policy forum (NPF), which meets this weekend in Leeds, and whose members include the shadow cabinet and trade union leaders. Labour has set up eight policy commissions since last year’s general election, to consult members and develop policy, but none focus on Brexit. The party has said Brexit is covered under the international policy commission, involving Keir Starmer, the shadow Brexit secretary, but that commission is not at the moment accepting submissions on Brexit. The Guardian, February 15